The government is likely to partly adopt a government panel's advice to lift price controls on gasoline and diesel, but will put the brakes on potentially more politically jarring hikes in the prices of cooking fuels.
The government is likely to partly adopt a government panel's advice to lift price controls on gasoline and diesel, but will put the brakes on potentially more politically jarring hikes in the prices of cooking fuels.
While the government has ignored two reports advising similar phase-outs of fuel subsidies in the past five years, a more favourable political climate, moderate global energy prices and the need to cut a fiscal deficit mean at least some of the recommendations made late on Wednesday will probably be adopted.
"What is most likely is petrol, because petrol is perceived to be consumed by rich classes. I think second in line would be diesel to some extent, and maybe some token increase, if at all it happens, in LPG and kerosene," said DK Joshi, an economist at ratings agency Crisil in Mumbai.
Market-driven prices would help curb fuel use in India, which along with China was widely blamed for stoking demand that helped drive crude''s rally to $147 a barrel in 2008.
Crude oil prices, which fell to close to $32 in December 2008, are now hovering around $76.50 a barrel, still 48 percent below record levels.
The panel has advised eliminating price controls for gasoline and diesel and an income-linked rise in kerosene and cooking gas prices. Oil minister Murli Deora said the cabinet would consider the recommendations in seven to 10 days.
Kerosene prices in India have not been revised since 2002 while cooking gas prices were raised in 2008, only to be rolled back after protests from political parties and ordinary people.
Shares in oil retailers were higher in a weaker market on Thursday, but bonds were largely unmoved as traders wait to see how far the government will go in ditching subsidies, which would improve its fiscal position but also add inflationary pressure.
The Congress government was re-elected last year by a wide margin, is not constrained by coalition partners, and faces no major state elections until October.
Still, the party's core constituency is mainly poor and rural, and the government has moved more slowly than many investors had expected in implementing pro-market reforms.
The government is also pressured by surging inflation driven by food prices, which rose 17.56 percent on an annual basis through late January, and have prompted violent protests.
Overall wholesale price index (WPI) inflation is on track to hit double-digits by the end of March, some economists forecast, which would only be exacerbated by higher prices on fuel.
"Maybe they will wait for a good crop to come in, so that food prices cool down a bit. Then a move will be more politically palatable," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services.
SHIFTING BURDEN
India sets retail prices of petrol, diesel, cooking gas and kerosene to help control inflation and protect consumers, particularly the poor, from sharp fluctuations in energy prices, a burden shared by energy companies and the government.
The government partially compensates state-run retailers for selling fuel at cheaper rates. Upstream state firms Oil and Natural Gas Corp and Oil India are required to sell crude at a hefty discount to ease the pain of retailers.
The petroleum secretary said this week that retailers were likely to suffer a revenue loss of 430 billion rupees ($9.3 billion) in the current fiscal year on sale of the four products. The country is under pressure from investors to cut a fiscal deficit to hit 6.8 percent of GDP in its current fiscal year.
A revamped slate of fuel subsidies could be unveiled as soon as Feb. 26, when the finance ministry releases its budget.
Crisil's Joshi said easing subsidies would not dramatically improve government finances but would be a key reform measure.
"This will be a very positive signal that the government has started correcting at least this distortion on the fiscal side," he said.
POLITICAL WILL
While many observers said India should implement market-based pricing, few expect bold action, given past experience.
"We believe the suggestions are likely too aggressive to be implemented in current form, given inflation concerns, implementation issues and political considerations. A one-time hike in gasoline and diesel prices is all that might happen, in our view," Goldman Sachs analysts wrote in a note.
India, Bangladesh and Sri Lanka are the only energy importers among developing countries where oil companies and the central government bear the oil price impact without any transparent formula for calculating the help to oil marketing firms.
The finance ministry paid 120 billion rupees in cash to subsidise the sale of cooking fuel in April-December, less than the oil ministry's request for nearly 210 billion rupees.
Neighbouring China, by comparison, is fine-tuning its fuel pricing regime to make changes more frequent and reflective of global markets.
Beijing last year implemented a system to track a basket of global crude prices that more or less guarantees a margin for refiners when crude is under $80.
"China has been changing fuel prices more frequently as compared to past years despite the fact that some problems in India and China are very similar," said Sushant Gupta, senior analyst at Wood Mackenzie.
China raised retail fuel prices five times and cut them three times in 2009. India has raised retail prices only once in 2009.
"I don't think the government will take a bull-in-a-china-shop approach. They will play it cautiously," said Rawal at Anand Rathi. "The fact is that it should be done, but it has long been curtailed due to lack of political will."
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